KAR Auction Services, Inc (KAR)

KAR 
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KAR Auction Services (KAR)

Credit Suisse 15th Annual Global Services Conference

March 11, 2013 6:30 pm ET

Executives

Eric M. Loughmiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Jonathan Peisner - Vice President of Investor Relations & Planning and Treasurer

Presentation

Unknown Analyst

Hello, everyone. Our next presentation is from KAR Auction Services. Presenting with us are Eric Loughmiller, Executive Vice President and CFO; followed by Jonathan Peisner, VP and Treasurer.

With that, I'll turn it over to Eric to head things off. Just a note, there will be a breakout session in the Pine room following the presentation. Thank you.

Eric M. Loughmiller

Good afternoon. As you can see on this slide, we have a number of what we think are key investment highlights, and I'll cover these throughout my presentation. But to introduce the company, the main thing that we're really focused on right now is we're poised to take advantage of a cyclical recovery in used car supply that will impact our largest business unit, ADESA, but let me cover these as we go through.

KAR Auction Services has 3 major business segments. First is ADESA. This is a used car wholesale auction business. It operates in the U.S., Canada and Mexico. We have 67 auction locations, and we operate this business throughout those countries for virtually all the customers. We are #2 in market share. Our largest competitor is Manheim, which is owned by Cox Media. And they have about 50% market share, and we are just under 25% market share. Then there's Insurance Auto Auctions, a salvage auction business. Predominantly, this is the auction of total loss vehicles sold by the insurance companies after they take title following an accident. And, again, this is a real solid business, operates in the U.S. and Canada in 163 locations. And we also operate in a duopoly situation where our key competitor is Copart, which, again, 35% to 40% market share for both us and Copart. The reason we're less specific on market share is there's no industry reporting data, so we kind of have to estimate based upon the number of cars sold as we can find out that information. Then Automotive Finance Corporation, or AFC, is our floorplan finance business. This business is complementary to the other 2. And the finance business operates through 104 loan origination offices, predominately located inside of auction facilities, 4 of which are now at Insurance Auto Auctions locations and the remainder are affiliated with used car auction locations. In this business, we also have a key competitor who's a little bit bigger than us. It's the combination of Manheim's captive floorplan business, as well as an independent known as DSC, or Dealer Services Corporation. They have just rebranded themselves as NextGear Capital. And, again, they are part of the Cox family of companies as well.

In terms of our marketplace, this is really an important slide, and it's traveled around the world. People have used it in actually other presentations, not by our company. There's 272 million vehicles on the road in the U.S. and Canada. We call it North America, but it's really the U.S. and Canada. And with that, at this point, 15 million to 16 million units are being added to the car park through new car sales and about 13 million units per year are actually in the car park through accidents which result in a total loss, cars that are not reregistered for various reasons. It could be an individual that quits driving the car. Due to a death, they may not reregister the vehicle. And of those 13 million units, 3 million to 4 million or about 3.5 million to 4 million end up being sold through our salvage auctions. In addition, we have 43 million used cars that change hands annually. And how do those break down? 12 million, and you see that on the lower left in a salmon color, are C2C. In other words, a consumer sells to another consumer not involving a dealer. Then you have 31 million that are changing hands, involving some type of dealer transaction. And of those 31 million, 8 million to 10 million, the dealer acquires through a wholesale auction, and 20 million to 22 million are dealer trades, taking a trade-in, trading with other dealers, avoiding the wholesale marketplace but doing it amongst the dealer network itself. So it's a very robust population of vehicles with -- again, it's been a fairly consistent number. That number in the car park has been growing over an extended period of time as more drivers are on the road. And through 2008 and 2009, with the reduced SAAR, we saw it somewhat level, but again, it's a slow-growing number now but sufficiently large that we see plenty of cars that are in our marketplace and an opportunity for us to make money selling.

So how do we make money? Well, we make money by charging for any aspect of the transaction we're involved in. On the left here, you see the sellers and on the right, you see the buyers. We draw a fee from each of them in the transaction. In addition, to the buy and the sell fee, we have a number of value-added services that we can provide before auction, predominantly paid by the seller, and that would involve reconditioning, transportation, mechanics, body shop, all of the services we can provide for a car from our own locations with our own employees. And then after the sale, we can do post-sale inspections and a number of other services, transportation, and we can actually recondition the car for a used car dealer that maybe doesn't have those facilities on his lot. So we charge a fee for everything. And then AFC is involved. If they floorplan a vehicle, they charge a fee for providing access to those resources and providing a floorplan receivable to the independent used car dealers.

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